Does Delaying Social Security Deliver an 8% Return?

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Eagle33
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Does Delaying Social Security Deliver an 8% Return?

Post by Eagle33 » Wed May 13, 2020 3:53 pm

Christine Benz article includes use of Mike Piper's free Open Social Security calculator.
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
The calculator provides an excellent illustration of how sensitive Social Security filing is to personal variables. As Social Security is the largest retirement "asset" for the vast majority of people in the U.S., it's worthwhile to go beyond conventional wisdom when determining how best to maximize it.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by randomguy » Wed May 13, 2020 3:58 pm

The answer is a simple no. Delaying gives you an 8% increase in payments at the cost of 1 year of income. What return that gives will depend on how long you live and what return you get on that payment.

Next up: SPIAs also don't give out 7%+ returns:)

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by willthrill81 » Wed May 13, 2020 4:06 pm

There's a big difference in an increase in returns and an increase in payout. Delaying SS benefits does the latter, not the former.

While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Flobes » Wed May 13, 2020 4:16 pm

Eagle33 wrote:
Wed May 13, 2020 3:53 pm
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
randomguy wrote:
Wed May 13, 2020 3:58 pm
The answer is a simple no. Delaying gives you an 8% increase in payments at the cost of 1 year of income. What return that gives will depend on how long you live and what return you get on that payment.
willthrill81 wrote:
Wed May 13, 2020 4:06 pm
While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Delaying Social Security leaves an open AGI window to maximize other financial opportunities that might become restricted or more costly with Social Security income. Think ACA subsidies and cost-sharing benefits, Roth conversions, various tax credits, etc. Myself: My ACA benefits saved @$18k a year, which would have evaporated had I collected SS at 62.

These strategies of keeping SS out of AGI can have bigly financial returns, short-term and long-term, piled onto the increased payout of Social Security.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by willthrill81 » Wed May 13, 2020 4:22 pm

Flobes wrote:
Wed May 13, 2020 4:16 pm
Eagle33 wrote:
Wed May 13, 2020 3:53 pm
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
randomguy wrote:
Wed May 13, 2020 3:58 pm
The answer is a simple no. Delaying gives you an 8% increase in payments at the cost of 1 year of income. What return that gives will depend on how long you live and what return you get on that payment.
willthrill81 wrote:
Wed May 13, 2020 4:06 pm
While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Delaying Social Security leaves an open AGI window to maximize other financial opportunities that might become restricted or more costly with Social Security income. Think ACA subsidies and cost-sharing benefits, Roth conversions, various tax credits, etc. Myself: My ACA benefits saved @$18k a year, which would have evaporated had I collected SS at 62.

These strategies of keeping SS out of AGI can have bigly financial returns, short-term and long-term, piled onto the increased payout of Social Security.
Yes, there can be many factors impacting the decision as to when to start SS benefits. Part of the reason we intend to delay to age 70 is to give us maximum time to make Roth conversions.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Halicar » Wed May 13, 2020 6:32 pm

It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Vanguard Fan 1367 » Wed May 13, 2020 6:40 pm

willthrill81 wrote:
Wed May 13, 2020 4:22 pm
Flobes wrote:
Wed May 13, 2020 4:16 pm
Eagle33 wrote:
Wed May 13, 2020 3:53 pm
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
randomguy wrote:
Wed May 13, 2020 3:58 pm
The answer is a simple no. Delaying gives you an 8% increase in payments at the cost of 1 year of income. What return that gives will depend on how long you live and what return you get on that payment.
willthrill81 wrote:
Wed May 13, 2020 4:06 pm
While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Delaying Social Security leaves an open AGI window to maximize other financial opportunities that might become restricted or more costly with Social Security income. Think ACA subsidies and cost-sharing benefits, Roth conversions, various tax credits, etc. Myself: My ACA benefits saved @$18k a year, which would have evaporated had I collected SS at 62.

These strategies of keeping SS out of AGI can have bigly financial returns, short-term and long-term, piled onto the increased payout of Social Security.
Yes, there can be many factors impacting the decision as to when to start SS benefits. Part of the reason we intend to delay to age 70 is to give us maximum time to make Roth conversions.
I don't want to look up the reference but I understand that a small percentage of SS recipients wait till 70 to start collecting benefits. I am like you and doing Roth Conversions in the few years between retirement and starting my social security benefits at 70.

I know someone who plans to work till 70 but start taking benefits at 66. I think they would benefit from trying to not collect till 70 because they haven't invested with Boglehead principles and I don't think they have a lot in their retirement plan. I think they would benefit from that extra money at 70 but their financial advisor disagrees with me. But I haven't seen the actual numbers so I am just making an uneducated guess.

I find the math involved in the many decisions involving Roth Conversions, Social Security Benefit Strategies, IRMAA surcharges, taxing of social security benefits, Medicare taxes on investment income, and other things to be rather complex. You certainly don't get a straight 8% increase in your income by delaying till 70. It is much more complex than that.
Last edited by Vanguard Fan 1367 on Wed May 13, 2020 7:35 pm, edited 1 time in total.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by bberris » Wed May 13, 2020 7:21 pm

Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
I suppose it is legal; IANAL. What you are describing is essentially a multiple-premium, limited-term annuity. Normally the annuitant pays the premium before receiving the annuity so that the insurance company can buy bonds to fund the annuity. What you are proposing is multiple premiums that would be paid in installments at the end of the term, unless the annuitant is at room temperature ...

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by randomguy » Wed May 13, 2020 7:43 pm

Flobes wrote:
Wed May 13, 2020 4:16 pm
Eagle33 wrote:
Wed May 13, 2020 3:53 pm
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
randomguy wrote:
Wed May 13, 2020 3:58 pm
The answer is a simple no. Delaying gives you an 8% increase in payments at the cost of 1 year of income. What return that gives will depend on how long you live and what return you get on that payment.
willthrill81 wrote:
Wed May 13, 2020 4:06 pm
While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Delaying Social Security leaves an open AGI window to maximize other financial opportunities that might become restricted or more costly with Social Security income. Think ACA subsidies and cost-sharing benefits, Roth conversions, various tax credits, etc. Myself: My ACA benefits saved @$18k a year, which would have evaporated had I collected SS at 62.

These strategies of keeping SS out of AGI can have bigly financial returns, short-term and long-term, piled onto the increased payout of Social Security.
Sure but your return wasn't 8%. It might have been higher. It might have been lower. Thinking you are getting an 8% return because your payment goes up 8% is a fundamental misunderstanding of what is going on.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by David Jay » Wed May 13, 2020 7:47 pm

Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
That's what I am doing. My financial institution is my retirement portfolio.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Church Lady » Wed May 13, 2020 7:54 pm

Delaying Social Security past your Full Retirement Age up until age 70 increases the payout by 8% in that interim. Delaying SS from age 62 to FRA increases the payout, but by a smaller percentage each year.

You could alternatively say the payout reduction decreases as you approach FRA, and that is how SS looks at it. But for planning purposes, I prefer to think of it as the benefit increasing each year I delay past age 62.

In my case, delaying Social Security to age 63 increases my benefit by 5%. To age 64, by 5.5% (over the prior year). To age 65, by 6.7%. And so on, up to FRA.

Better than a sharp stick in the eye, but not 8% a year. A lot of writers and posters don't seem to be aware you have to wait until FRA to start seeing 8% increases.

It actually differs based on your year of birth, too, so you need to go to the official SS website and look up your case to see the effect of delaying SS each year from age 62 to FRA.

There are SS calculators to help you devise an optimal claiming strategy based on the fact you could be investing your SS checks before age 70. I haven't done mine for a couple years, but it suggested claiming earlier than age 70 would be optimal for me.
https://opensocialsecurity.com
Be sure to check 'Advanced Options' at the top of the page as you play with this calculator.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by willthrill81 » Wed May 13, 2020 8:10 pm

If I pay you $40k a year for 11 years or pay you $44k for 10 years, you aren't better off in the latter scenario. Due to the time value of money, you're actually better off in the first scenario.

The implications of delaying SS benefits are a lot more complicated than that, but at the core, that's what happens when you defer SS benefits. That doesn't mean that deferring is a bad deal. On the contrary, we're planning on deferring to age 70 because SS benefits will be part of our 'longevity insurance'.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by JBTX » Wed May 13, 2020 8:13 pm

I used basic assumptions and assumed I'm single which I'm not. The PV of waiting until 69 vs retiring at 62 was an increase in present value of almost 10%.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by FIREchief » Wed May 13, 2020 8:33 pm

JBTX wrote:
Wed May 13, 2020 8:13 pm
I used basic assumptions and assumed I'm single which I'm not. The PV of waiting until 69 vs retiring at 62 was an increase in present value of almost 10%.
How long did you assume to live?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by averagedude » Wed May 13, 2020 8:39 pm

To me, delaying social security to get 8% increases isn't about maximizing payouts. It's about mitigating longevity risk. As a middle income US citizen, the payout at 70 gives me a floor of income that I can be content with if need be. I also love the fact that this income is inflation adjusted forever. Very difficult to find an inflation protected product that gives you 8% increases that is guaranteed by the full faith of the US government that can easily raise taxes to honer their commitment.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by rich126 » Wed May 13, 2020 8:46 pm

There are no easy answers. I suppose if you have more than enough money, it doesn't hurt your living style to delay it, but you may end up never making the money back depending on how long you live.

I know a number of people who probably don't need it but will take it as soon as possible. Depending on health I might delay it a bit but I doubt until 70. My view point is a bit negative right now to losing a friend at 58 (he did manage to retire at 56).

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by JBTX » Wed May 13, 2020 8:56 pm

An increase in payout of 8% by delaying one year, is essentially an 8% inflation adjusted annuity. When you could buy inflation adjusted spia annuities the annuity rate was usually between 3-4%, so 8 percent inflation adjusted is vastly Superior to a market based annuity.

The doesn't mean the rate of return is 8%. The rate of return is dependent on how long you live.

The IRR on an 8% annuity for 16 years (83 years-67 years) is 3.1%. Since the 8% is inflation adjusted that is 3.1 real, which would be maybe 5.5% nominal rate of return.

If you live 20 years to 87, the real IRR is 5%, which gets you to about 7.5% nominal. 22 years or 89 gets you 5.6% IRR real plus inflation should be around 8% nominal rate of return.

The life expectancy of a typical 67 year old male is 84.4 years. However studies suggest that higher income individuals tend to live at least several years longer than the median. So for a typical 67 year old boglehead the life expectancy is probably close to 89, especially if you average in females and/or if lower earning spouse outlives you.

Bottom line for a typical boglehead at full retirement age 8% may be a reasonably close estimate for rate of return. YMMV.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Stinky » Wed May 13, 2020 10:12 pm

Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by lostcoast » Wed May 13, 2020 11:13 pm

I just started my SS last month at age 65. My reason is that my 64 year old wife gets zero of my SS due to WEP rules. She has a Ca. state teacher's retirement (CALSTRS) which leaves her out of collecting on my SS. I on the other hand receive her retirement if she goes before me. It's a 90% versus 100% if she chose to have her retirement stop upon her death. My figuring is to take SS now and invest it rather than spend it so she can use it if needed. I didn't spend a lot of time running the numbers on this, just thought I'd wait until medicare kicked in and time it with that.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by #Cruncher » Thu May 14, 2020 4:48 am

randomguy wrote:
Wed May 13, 2020 3:58 pm
Delaying gives you an 8% increase in payments at the cost of 1 year of income.
Delaying one year increases the benefit anywhere from 6.5% to 8.3% depending on the age you delay to and on your Normal Retirement Age (NRA). As shown on this SSA web page, the Normal Retirement Age (aka Full Retirement Age) varies from 66 for those born 1943-1954 to 67 for those born 1960 or later.

Code: Select all

Row  Col A      Col B     Col C     Col D     Col E     Col F     Col G     Col H
  1   Born       1954      1955      1956      1957      1958      1959      1960 
  2    NRA     66.000    66.167    66.333    66.500    66.667    66.833    67.000 
  3  Start   ------------- Percent of Primary Insurance Amount (PIA) ------------
  4     62    75.000%   74.167%   73.333%   72.500%   71.667%   70.833%   70.000% 
  5     63    80.000%   79.167%   78.333%   77.500%   76.667%   75.833%   75.000% 
  6     64    86.667%   85.556%   84.444%   83.333%   82.222%   81.111%   80.000% 
  7     65    93.333%   92.222%   91.111%   90.000%   88.889%   87.778%   86.667% 
  8     66   100.000%   98.889%   97.778%   96.667%   95.556%   94.444%   93.333% 
  9     67   108.000%  106.667%  105.333%  104.000%  102.667%  101.333%  100.000% 
 10     68   116.000%  114.667%  113.333%  112.000%  110.667%  109.333%  108.000% 
 11     69   124.000%  122.667%  121.333%  120.000%  118.667%  117.333%  116.000% 
 12     70   132.000%  130.667%  129.333%  128.000%  126.667%  125.333%  124.000%

Code: Select all

 13     To     --------------- Increase from Delaying One Year ----------------
 14     63      6.7%      6.7%      6.8%      6.9%      7.0%      7.1%      7.1% 
 15     64      8.3%      8.1%      7.8%      7.5%      7.2%      7.0%      6.7% 
 16     65      7.7%      7.8%      7.9%      8.0%      8.1%      8.2%      8.3% 
 17     66      7.1%      7.2%      7.3%      7.4%      7.5%      7.6%      7.7%
 
 18     67      8.0%      7.9%      7.7%      7.6%      7.4%      7.3%      7.1% 
 19     68      7.4%      7.5%      7.6%      7.7%      7.8%      7.9%      8.0% 
 20     69      6.9%      7.0%      7.1%      7.1%      7.2%      7.3%      7.4% 
 21     70      6.5%      6.5%      6.6%      6.7%      6.7%      6.8%      6.9%
Here is the formula in cell B4 that calculates the percent of PIA. It is copied down to row 12 and right to column H.
75.000% = IF($A4<B$2,1-(5/900)*MIN(36,(B$2-$A4)*12)-(5/1200)*MAX(0,(B$2-$A4)*12-36),1+(8/1200)*($A4-B$2)*12)
randomguy, continuing is same post wrote:What return that gives will depend on how long you live …
Correct. For example, as JBTX says in this post, if delaying one year increases your benefit 8% and you live 16 more years, the return would be 3.1%. The following table shows the returns from delaying one year for a person with a Normal Retirement Age (NRA) of 67. For example, delaying from age 67 to 68 increases the benefit 8%. One would need to live at least to age 81 before the return would become positive. But delaying from age 69 to 70 increases the benefit only 6.9% and one would need to live at least to age 85 before the return would become positive.

Code: Select all

Row    Col A  Col B   Col C   Col D   Col E   Col F   Col G   Col H   Col I   Col J
  1     Born   1960
  2      NRA     67
             -------- Claim Age, Percent of PIA, and Increase vs Prior Year ----==-
  3             62      63      64      65      66      67      68      69      70
  4          70.000  75.000  80.000  86.667  93.333 100.000 108.000 116.000 124.000
  5                    7.1%    6.7%    8.3%    7.7%    7.1%    8.0%    7.4%    6.9%
     Die Age          ---------------- Return for Delaying One Year ---------------

Code: Select all

  6       76          (1.0%)  (3.3%)  (1.4%)  (4.5%)  (8.0%)  (9.0%) (14.2%) (20.6%)
  7       77          (0.0%)  (2.0%)  (0.0%)  (2.7%)  (5.7%)  (6.1%) (10.4%) (15.5%)
  8       78           0.9%   (0.9%)   1.2%   (1.2%)  (3.8%)  (3.9%)  (7.4%) (11.6%)
  9       79           1.6%   (0.0%)   2.1%    0.0%   (2.3%)  (2.1%)  (5.1%)  (8.6%)
 10       80           2.2%    0.8%    2.9%    1.0%   (1.0%)  (0.6%)  (3.3%)  (6.2%)

 11       81           2.8%    1.4%    3.6%    1.8%   (0.0%)   0.6%   (1.8%)  (4.3%)
 12       82           3.3%    2.0%    4.2%    2.6%    0.9%    1.5%   (0.5%)  (2.8%)
 13       83           3.7%    2.5%    4.7%    3.2%    1.6%    2.4%    0.5%   (1.5%)
 14       84           4.0%    2.9%    5.1%    3.7%    2.2%    3.1%    1.3%   (0.5%)
 15       85           4.3%    3.3%    5.5%    4.1%    2.8%    3.7%    2.1%    0.4%

 16       86           4.6%    3.6%    5.8%    4.5%    3.3%    4.2%    2.7%    1.2% 
 17       87           4.9%    3.9%    6.0%    4.8%    3.7%    4.6%    3.2%    1.8% 
 18       88           5.1%    4.2%    6.3%    5.1%    4.0%    5.0%    3.7%    2.4% 
 19       89           5.3%    4.4%    6.5%    5.4%    4.3%    5.3%    4.1%    2.9% 
 20       90           5.4%    4.6%    6.7%    5.6%    4.6%    5.6%    4.4%    3.3%

 21       91           5.6%    4.8%    6.8%    5.8%    4.9%    5.8%    4.7%    3.6% 
 22       92           5.7%    4.9%    7.0%    6.0%    5.1%    6.0%    5.0%    4.0% 
 23       93           5.8%    5.1%    7.1%    6.2%    5.3%    6.2%    5.2%    4.2% 
 24       94           6.0%    5.2%    7.2%    6.3%    5.4%    6.4%    5.4%    4.5% 
 25       95           6.1%    5.3%    7.3%    6.4%    5.6%    6.6%    5.6%    4.7%

 26       96           6.1%    5.4%    7.4%    6.5%    5.7%    6.7%    5.8%    4.9% 
 27       97           6.2%    5.5%    7.5%    6.6%    5.8%    6.8%    5.9%    5.1% 
 28       98           6.3%    5.6%    7.6%    6.7%    6.0%    6.9%    6.1%    5.3% 
 29       99           6.4%    5.7%    7.7%    6.8%    6.1%    7.0%    6.2%    5.4% 
 30      100           6.4%    5.8%    7.7%    6.9%    6.1%    7.1%    6.3%    5.5%
Here is the formula in cell C6 (using the Excel RATE function) that is copied down to row 30 and right to column J:
-1.0% = RATE($A6-C$3,C$4-B$4,-B$4,0,0)

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by vested1 » Thu May 14, 2020 4:48 am

Vanguard Fan 1367 wrote:
Wed May 13, 2020 6:40 pm

I know someone who plans to work till 70 but start taking benefits at 66. I think they would benefit from trying to not collect till 70 because they haven't invested with Boglehead principles and I don't think they have a lot in their retirement plan. I think they would benefit from that extra money at 70 but their financial advisor disagrees with me. But I haven't seen the actual numbers so I am just making an uneducated guess.

Gee, I wonder why their advisor would say that? Could it be that by not delaying from age 66 to age 70 that the client would have more money to invest, and thus pass on more as a percentage of their gain to the advisor? How convenient.

It kind of reminds me of the commercials by Fisher Investments "We do better when you do better". As do all AUM investment advisors who rake off a percentage of your gain for very little added value. Invest more (and we get paid more) would be a more honest statement.

I would mention this profit motive to your acquaintance if the subject comes up.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by vested1 » Thu May 14, 2020 4:57 am

willthrill81 wrote:
Wed May 13, 2020 4:06 pm
There's a big difference in an increase in returns and an increase in payout. Delaying SS benefits does the latter, not the former.

While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Likely true for the OP, but for a rapidly dwindling number of those contemplating a delay, the benefit from a restricted application is the exception. This amount is often ignored by those who tout break-even numbers, an argument which I find has little merit. I've received over $1,000 a month since my FRA two years ago while delaying SS until age 70, which increases every year because of COLA on my wife's benefit.

This makes my break-even point years sooner than if I had not had the opportunity to file a restricted application on my wife's benefit. A small point, but one that shouldn't be ignored for a few who may be following this thread who may also be old enough to fall into that category.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by nisiprius » Thu May 14, 2020 6:12 am

It certainly shouldn't be an 8% return, because Social Security is intended to be "actuarially neutral." I believe that to a rough approximation it is. You shouldn't be getting any 8% "return," you merely have concentrated about the same number of dollars into a shorter time period.

I keep hearing that 8% round number and I suspect it is not any kind of "return" at all, but the "credit for each year of delayed retirement after NRA (percent)." See more at the end.

So the net present value of future benefits and internal rate of return and so forth are supposed to be about the same.

People who don't believe in acting on the basis of rough approximations always challenge this, on the basis of innumerable details, e.g. the benefits are unisex but women have longer life expectancy, therefore, for any detailed calculation X the numbers will come out quite a bit different for men and for women (and spousal benefit yadda yadda). But the numbers all depend on assumptions and predicitions that can't be estimated all that reliably.

The elephant in the room is that the SSA says that (if congress takes no action), after about 2035 the trust fund(s) will be exhausted and taxes will only be able to pay about 79% of scheduled benefits. It actually says something like this on every annual Social Security statement. Regardless of what one might think about what Congress might or might not do, any calculation of the any Social Security claiming strategy needs to take this elephant into account somehow--e.g. doing the calculations both assuming no change in benefits and assuming a 20% cut in 2035.

To be clear, bobcat2 who has posted on this a number of times has said emphatically that delaying filing is beneficial, even assuming that possible cut.

A retirement strategy has a lot of moving parts to it. You will hopefully be spending money all through ages 62-70, so it is always a comparison between getting it from Social Security and getting it from somewhere else.

P.S. Social Security itself has material on this, which shouldn't be ignored completely. They say:
What's the best time to start your retirement benefits? We're not recommending that you start at age 62, your full retirement age, age 70, or any age in between. Here's some additional information that may help you decide what's right for you...
Honestly, I don't think they would say that if it were no-brainer that everybody would benefit immensely by waiting until 70. They provide various (fairly shallow) tools and analyses, including a table that "illustrates the complex interaction among normal retirement age, actuarial reduction, and delayed retirement credit."

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by tvubpwcisla » Thu May 14, 2020 6:37 am

An 8% return sounds tempting for sure. Not sure I believe it; however, will probably delay to maximize my benefits. If it works out to an 8% return great, and if not, that's fine too. Thanks for sharing!
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by nisiprius » Thu May 14, 2020 6:37 am

Here's an anecdote displaying a rarely-mentioned potential risk of delay. As far as I know, delaying past age 70 is just pure permanent loss, foregone benefits. You miss out on whatever payments would have been made starting at age 70, period.

A late friend of mine was diagnosed with terminal cancer. I visited him while he was still functioning independently. He was 72 years old. He was a professor at a private college. I won't exactly call him an "absent-minded professor" but he was far more interested in his praying mantises, his aquariums, and his students than in anything financial. It transpired that he had never filed for Social Security. Just had never gotten around to it, hadn't thought about it. I expressed some dismay, and told him that we were going to his computer right now and that I was going to stand behind his chair and I was not going to move until he had filed online--which in his took less than twenty minutes. It can be very easy, because they have everything from all your paychecks. "Hi, I'm me, remember me? I'm 078-05-1120 but you can just call me 'seventy.' I'm ready for my benefits now please."

So, whatever you do, I don't think you should literally wait for seventy candles on the cake because, you know, you might forget to do it. Or something like a pandemic might happen. I'm not sure what options are available for filing before age 70 but specifying that benefits should only begin at age 70. My friend actually get a five-digit retroactive check for that year's benefits back to the start of the year, or something, but he had simply missed out on two full years benefits. That isn't optimal.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by afan » Thu May 14, 2020 7:09 am

bberris wrote:
Wed May 13, 2020 7:21 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
I suppose it is legal; IANAL. What you are describing is essentially a multiple-premium, limited-term annuity. Normally the annuitant pays the premium before receiving the annuity so that the insurance company can buy bonds to fund the annuity. What you are proposing is multiple premiums that would be paid in installments at the end of the term, unless the annuitant is at room temperature ...
Borrow the money to buy the annuity. Perfectly legal.
Not sure it works out financially, after the interest expense on the loan and costs of the annuity.

Or skip the annuity, borrow the money and pay it back once you start SS. I doubt this would be favorable either.

Individualized prediction of when you will die also matters. If you are in bad health and unlikely to live long enough for delay to pay off, then start earlier.
If you are in great health and have a great family history, then delaying is a better bet.
Other issues come up if you are married.
Last edited by afan on Thu May 14, 2020 7:16 am, edited 1 time in total.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by azanon » Thu May 14, 2020 7:15 am

nisiprius wrote:
Thu May 14, 2020 6:37 am
So, whatever you do, I don't think you should literally wait for seventy candles on the cake because, you know, you might forget to do it. Or something like a pandemic might happen. I'm not sure what options are available for filing before age 70 but specifying that benefits should only begin at age 70. My friend actually get a five-digit retroactive check for that year's benefits back to the start of the year, or something, but he had simply missed out on two full years benefits. That isn't optimal.
I was just reading about Mike Tyson's (possible) comeback w/video, and your point here reminded me of one of my favorite quotes of all time, attributed to Mike Tyson: "Everyone has a plan until they get punched in the mouth." Great point, Nisiprius.

Me? I'm a bird-in-the-hand kind of guy, so it'll be 62 for me. I'm not saying SS is a Ponzi scheme but as a Fed, I've been furloughed way too many times to put any degree of faith into some promised, much higher payment 8 years later. I want as much $$ back as possible, as soon as possible, to mitigate any potential loss.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by michaeljc70 » Thu May 14, 2020 8:28 am

willthrill81 wrote:
Wed May 13, 2020 4:06 pm
There's a big difference in an increase in returns and an increase in payout. Delaying SS benefits does the latter, not the former.

While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Yes. I would view it as they are paying you the extra money with principal mostly. The principal being the money you didn't get by delaying taking ss.

For example, say you were to get 20k/yr and delay one year. You will get $1600 extra per year when you collect. So, 20,000/1600 = 12.5. So the first 12.5 years you are getting money you would have gotten if you collected without the delay. Of course, this isn't taking into account interest that the government would have earned on the money before it is paid out (or you could have earned if you collected earlier).
Last edited by michaeljc70 on Thu May 14, 2020 8:55 am, edited 1 time in total.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by dbr » Thu May 14, 2020 8:37 am

Eagle33 wrote:
Wed May 13, 2020 3:53 pm
Christine Benz article includes use of Mike Piper's free Open Social Security calculator.
"Delaying Social Security delivers an 8% guaranteed return." You often see those words. I've written them myself. But does it, really?
Making statements like that is not helpful. The right thing to do is to describe what can actually happen and discuss the possible advantages and disadvantages in any particular case. That has been presented by some posters on this thread. You can't gain by making something complex too simple. Why investment writers engage in this sort of quip is beyond me, but they all do it and create lots of confusion in doing so. We don't have to mention that "SS is a bond" "Stocks are toxic" and some of the others.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by #Cruncher » Thu May 14, 2020 8:52 am

nisiprius wrote:
Thu May 14, 2020 6:12 am
... Social Security is intended to be "actuarially neutral." I believe that to a rough approximation it is. … So the net present value of future benefits and internal rate of return and so forth are supposed to be about the same. (underline added)
The internal rates of return from my previous post are not even roughly the same, Nisi. For example, for someone with a Normal Retirement Age (NRA) of 67, regardless of lifespan, delaying from age 64 to 65 produces a much higher return than delaying from age 69 to 70. If one lived to age 84, delaying a year to age 65 has a +5.1% internal rate of return, while delaying a year to age 70 doesn't even break even.

Code: Select all

Row    Col A  Col B   Col C   Col D   Col E   Col F   Col G   Col H   Col I   Col J
  1     Born   1960
  2      NRA     67
             -------- Claim Age, Percent of PIA, and Increase vs Prior Year ----==-
  3             62      63      64      65      66      67      68      69      70
  4          70.000  75.000  80.000  86.667  93.333 100.000 108.000 116.000 124.000
  5                    7.1%    6.7%    8.3%    7.7%    7.1%    8.0%    7.4%    6.9%
     Die Age          ---------------- Return for Delaying One Year ---------------
  9       79           1.6%   (0.0%)   2.1%    0.0%   (2.3%)  (2.1%)  (5.1%)  (8.6%)
 14       84           4.0%    2.9%    5.1%    3.7%    2.2%    3.1%    1.3%   (0.5%) <===
 19       89           5.3%    4.4%    6.5%    5.4%    4.3%    5.3%    4.1%    2.9% 
 24       94           6.0%    5.2%    7.2%    6.3%    5.4%    6.4%    5.4%    4.5% 
 29       99           6.4%    5.7%    7.7%    6.8%    6.1%    7.0%    6.2%    5.4%
As far as "net present value of future benefits" … "supposed to be about the same", this can only be the case for a particular discount rate. I challenge anyone to specify a discount rate that would make equal (even roughly) the present values of benefits starting at each of nine possible ages 62, 63, …, 69, and 70. And you can pick any assumed lifespan that benefits will run.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by michaeljc70 » Thu May 14, 2020 9:19 am

#Cruncher wrote:
Thu May 14, 2020 8:52 am
nisiprius wrote:
Thu May 14, 2020 6:12 am
... Social Security is intended to be "actuarially neutral." I believe that to a rough approximation it is. … So the net present value of future benefits and internal rate of return and so forth are supposed to be about the same. (underline added)
The internal rates of return from my previous post are not even roughly the same, Nisi. For example, for someone with a Normal Retirement Age (NRA) of 67, regardless of lifespan, delaying from age 64 to 65 produces a much higher return than delaying from age 69 to 70. If one lived to age 84, delaying a year to age 65 has a +5.1% internal rate of return, while delaying a year to age 70 doesn't even break even.

Code: Select all

Row    Col A  Col B   Col C   Col D   Col E   Col F   Col G   Col H   Col I   Col J
  1     Born   1960
  2      NRA     67
             -------- Claim Age, Percent of PIA, and Increase vs Prior Year ----==-
  3             62      63      64      65      66      67      68      69      70
  4          70.000  75.000  80.000  86.667  93.333 100.000 108.000 116.000 124.000
  5                    7.1%    6.7%    8.3%    7.7%    7.1%    8.0%    7.4%    6.9%
     Die Age          ---------------- Return for Delaying One Year ---------------
  9       79           1.6%   (0.0%)   2.1%    0.0%   (2.3%)  (2.1%)  (5.1%)  (8.6%)
 14       84           4.0%    2.9%    5.1%    3.7%    2.2%    3.1%    1.3%   (0.5%) <===
 19       89           5.3%    4.4%    6.5%    5.4%    4.3%    5.3%    4.1%    2.9% 
 24       94           6.0%    5.2%    7.2%    6.3%    5.4%    6.4%    5.4%    4.5% 
 29       99           6.4%    5.7%    7.7%    6.8%    6.1%    7.0%    6.2%    5.4%
As far as "net present value of future benefits" … "supposed to be about the same", this can only be the case for a particular discount rate. I challenge anyone to specify a discount rate that would make equal (even roughly) the present values of benefits starting at each of nine possible ages 62, 63, …, 69, and 70. And you can pick any assumed lifespan that benefits will run.
When something is actuarilly neutral that doesn't mean everyone gets the same return. It means overall (all ss payouts), roughly the same amount of money will be paid out regardless of when people claim. It means if you live to the average life expectancy it should be neutral. The average life expectancy for a man in the US is 76 but your spreadsheet starts at 79.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by MathIsMyWayr » Thu May 14, 2020 9:35 am

No, never an 8% return unless you collect forever. If you defer until 70 and collect until the following age, the return (compounded) will be:
For the sake of simplicity, annual one time payments on birthday and the same annual return are assumed. As you can see, the return approaches slightly less than 8% if you collect forever. The discrepancy is due to a simple annual increase of 8% for deferring the start of SS benefits.
Age Equiv. return
70 -75.0%
71 -50.0%
72 -34.0%
73 -25.0%
74 -19.0%
75 -14.0%
76 -10.0%
77 -7.0%
78 -5.0%
79 -3.0%
80 -2.0%
81 -1.0%
82 0.0%
83 1.0%
84 2.0%
85 3.0%
86 3.4%
87 3.8%
88 4.0%
89 4.0%
90 4.5%
91 4.7%
92 5.0%
93 5.2%
94 5.4%
95 5.6%
96 5.7%
97 5.9%
98 6.0%
99 6.1%
100 6.2%
101 6.3%
102 6.3%
...
350 7.1873%
Last edited by MathIsMyWayr on Thu May 14, 2020 12:43 pm, edited 1 time in total.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by petulant » Thu May 14, 2020 10:05 am

Stinky wrote:
Wed May 13, 2020 10:12 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
This might make an interesting argument for a later duration of life insurance. The risk of premature death might be lowest just before early retirement, when assets are high and not being drawn down. Then, if assets are drawn down more aggressively during early retirement, premature death risk would increase and peak at age 70 or a bit after. From there, remaining assets would not be drawn down as much anymore and would climb back up as spending relies more on social security.

One spouse passing around, say, age 68 would mean the spouses drew down assets at a high rate, but at age 70 the surviving spouse would have from 1/2 to 2/3 of the income, which may be negative depending on the structure of expenses (that is, spending not down a full 33-50% just because one spouse passes).

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Vanguard Fan 1367 » Thu May 14, 2020 10:38 am

azanon wrote:
Thu May 14, 2020 7:15 am
nisiprius wrote:
Thu May 14, 2020 6:37 am
So, whatever you do, I don't think you should literally wait for seventy candles on the cake because, you know, you might forget to do it. Or something like a pandemic might happen. I'm not sure what options are available for filing before age 70 but specifying that benefits should only begin at age 70. My friend actually get a five-digit retroactive check for that year's benefits back to the start of the year, or something, but he had simply missed out on two full years benefits. That isn't optimal.
I was just reading about Mike Tyson's (possible) comeback w/video, and your point here reminded me of one of my favorite quotes of all time, attributed to Mike Tyson: "Everyone has a plan until they get punched in the mouth." Great point, Nisiprius.

Me? I'm a bird-in-the-hand kind of guy, so it'll be 62 for me. I'm not saying SS is a Ponzi scheme but as a Fed, I've been furloughed way too many times to put any degree of faith into some promised, much higher payment 8 years later. I want as much $$ back as possible, as soon as possible, to mitigate any potential loss.
I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by michaeljc70 » Thu May 14, 2020 10:48 am

Vanguard Fan 1367 wrote:
Thu May 14, 2020 10:38 am
azanon wrote:
Thu May 14, 2020 7:15 am
nisiprius wrote:
Thu May 14, 2020 6:37 am
So, whatever you do, I don't think you should literally wait for seventy candles on the cake because, you know, you might forget to do it. Or something like a pandemic might happen. I'm not sure what options are available for filing before age 70 but specifying that benefits should only begin at age 70. My friend actually get a five-digit retroactive check for that year's benefits back to the start of the year, or something, but he had simply missed out on two full years benefits. That isn't optimal.
I was just reading about Mike Tyson's (possible) comeback w/video, and your point here reminded me of one of my favorite quotes of all time, attributed to Mike Tyson: "Everyone has a plan until they get punched in the mouth." Great point, Nisiprius.

Me? I'm a bird-in-the-hand kind of guy, so it'll be 62 for me. I'm not saying SS is a Ponzi scheme but as a Fed, I've been furloughed way too many times to put any degree of faith into some promised, much higher payment 8 years later. I want as much $$ back as possible, as soon as possible, to mitigate any potential loss.
I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Not for everyone. There are many studies on this and this one is by Kitces.

https://www.kitces.com/blog/social-secu ... t-roi-irr/
In fact, those eligible for the lower and middle FICA replacement rates – up to $64,788 of lifetime inflation-adjusted average earnings – the ROI of paying FICA taxes can generate real returns that are actually competitive with current TIPS bond yields, potentially rising even higher for those in the lowest income tier, especially for individuals who are also older (in their 50s or early 60s) but very healthy (with a long life expectancy to continue receiving Social Security benefits in retirement itself). Although for upper-income individuals, even though with above-average health, the ROI on Social Security FICA taxes is generally negative.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by grabiner » Thu May 14, 2020 10:59 am

michaeljc70 wrote:
Thu May 14, 2020 10:48 am
Vanguard Fan 1367 wrote: I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Not for everyone. There are many studies on this and this one is by Kitces.

https://www.kitces.com/blog/social-secu ... t-roi-irr/
In fact, those eligible for the lower and middle FICA replacement rates – up to $64,788 of lifetime inflation-adjusted average earnings – the ROI of paying FICA taxes can generate real returns that are actually competitive with current TIPS bond yields, potentially rising even higher for those in the lowest income tier, especially for individuals who are also older (in their 50s or early 60s) but very healthy (with a long life expectancy to continue receiving Social Security benefits in retirement itself). Although for upper-income individuals, even though with above-average health, the ROI on Social Security FICA taxes is generally negative.
That article is primarily intended for self-employed people. Paying more FICA is a much better deal for employees, who pay only half the tax (with the other half paid by an employer for no cost or benefit to you) but receive the whole benefit.

This is relevant for such issues as whether to use payroll deduction to make your HSA contributions. If you contribute $2000 to an HSA by payroll deduction, this reduces your salary by $2000, so you pay $153 less in FICA, and your employer also pays $153 less. This is close to break-even if you are above the second bend point, and a big loss if you are below the second bend point; see Payroll deduction on the wiki.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by randomguy » Thu May 14, 2020 11:04 am

Stinky wrote:
Wed May 13, 2020 10:12 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
That isn't a problem. If you are in an EV+ situation (i.e. you expect to make money on the transaction), you just need to 10k bets so you get to the long term. Sure my return might only be 3% instead of 4%. but I am still making a lot more than I would in the 10 years.

Obviously you can' t do this because delaying SS doesn't deliver an 8% return. It is more like 1%.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by michaeljc70 » Thu May 14, 2020 11:04 am

grabiner wrote:
Thu May 14, 2020 10:59 am
michaeljc70 wrote:
Thu May 14, 2020 10:48 am
Vanguard Fan 1367 wrote: I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Not for everyone. There are many studies on this and this one is by Kitces.

https://www.kitces.com/blog/social-secu ... t-roi-irr/
In fact, those eligible for the lower and middle FICA replacement rates – up to $64,788 of lifetime inflation-adjusted average earnings – the ROI of paying FICA taxes can generate real returns that are actually competitive with current TIPS bond yields, potentially rising even higher for those in the lowest income tier, especially for individuals who are also older (in their 50s or early 60s) but very healthy (with a long life expectancy to continue receiving Social Security benefits in retirement itself). Although for upper-income individuals, even though with above-average health, the ROI on Social Security FICA taxes is generally negative.
That article is primarily intended for self-employed people. Paying more FICA is a much better deal for employees, who pay only half the tax (with the other half paid by an employer for no cost or benefit to you) but receive the whole benefit.

This is relevant for such issues as whether to use payroll deduction to make your HSA contributions. If you contribute $2000 to an HSA by payroll deduction, this reduces your salary by $2000, so you pay $153 less in FICA, and your employer also pays $153 less. This is close to break-even if you are above the second bend point, and a big loss if you are below the second bend point; see Payroll deduction on the wiki.
Don't you think employers account for that when they set your salary? And self-employed people adjust likewise. As someone who worked self-employed much of my life I always baked that extra FICA tax into my rate. If employers didn't pay that they could (and probably would) pay workers more.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Vanguard Fan 1367 » Thu May 14, 2020 11:09 am

grabiner wrote:
Thu May 14, 2020 10:59 am
michaeljc70 wrote:
Thu May 14, 2020 10:48 am
Vanguard Fan 1367 wrote: I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Not for everyone. There are many studies on this and this one is by Kitces.

https://www.kitces.com/blog/social-secu ... t-roi-irr/
In fact, those eligible for the lower and middle FICA replacement rates – up to $64,788 of lifetime inflation-adjusted average earnings – the ROI of paying FICA taxes can generate real returns that are actually competitive with current TIPS bond yields, potentially rising even higher for those in the lowest income tier, especially for individuals who are also older (in their 50s or early 60s) but very healthy (with a long life expectancy to continue receiving Social Security benefits in retirement itself). Although for upper-income individuals, even though with above-average health, the ROI on Social Security FICA taxes is generally negative.
That article is primarily intended for self-employed people. Paying more FICA is a much better deal for employees, who pay only half the tax (with the other half paid by an employer for no cost or benefit to you) but receive the whole benefit.

This is relevant for such issues as whether to use payroll deduction to make your HSA contributions. If you contribute $2000 to an HSA by payroll deduction, this reduces your salary by $2000, so you pay $153 less in FICA, and your employer also pays $153 less. This is close to break-even if you are above the second bend point, and a big loss if you are below the second bend point; see Payroll deduction on the wiki.
I heard this lecture in Dental School. At the time most of us would go on to self-employment. In today's world the situation is different, many new dentists will have an employer. Interesting comment about the not so great a deal for the self employed.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by grabiner » Thu May 14, 2020 11:11 am

michaeljc70 wrote:
Thu May 14, 2020 11:04 am
grabiner wrote:
Thu May 14, 2020 10:59 am
That article is primarily intended for self-employed people. Paying more FICA is a much better deal for employees, who pay only half the tax (with the other half paid by an employer for no cost or benefit to you) but receive the whole benefit.

This is relevant for such issues as whether to use payroll deduction to make your HSA contributions. If you contribute $2000 to an HSA by payroll deduction, this reduces your salary by $2000, so you pay $153 less in FICA, and your employer also pays $153 less. This is close to break-even if you are above the second bend point, and a big loss if you are below the second bend point; see Payroll deduction on the wiki.
Don't you think employers account for that when they set your salary? And self-employed people adjust likewise. As someone who worked self-employed much of my life I always baked that extra FICA tax into my rate. If employers didn't pay that they could (and probably would) pay workers more.
Employers account for the cost of FICA when they set your salary, since it is a cost of hiring employees.

However, once you are already employed, you may have options to affect your FICA such as payroll deduction. If you contribute $2000 to your HSA by payroll deduction, your employer will not give you a $153 raise to reflect the $153 it saved in payroll tax. Therefore, your decision should be based on whether the lost Social Security benefit is worth more or less than $153 to you. (If you were self-employed, then you would save the whole $306, and would compare the value of the benefit to $306.)
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by azanon » Thu May 14, 2020 11:16 am

Vanguard Fan 1367 wrote:
Thu May 14, 2020 10:38 am
azanon wrote:
Thu May 14, 2020 7:15 am
nisiprius wrote:
Thu May 14, 2020 6:37 am
So, whatever you do, I don't think you should literally wait for seventy candles on the cake because, you know, you might forget to do it. Or something like a pandemic might happen. I'm not sure what options are available for filing before age 70 but specifying that benefits should only begin at age 70. My friend actually get a five-digit retroactive check for that year's benefits back to the start of the year, or something, but he had simply missed out on two full years benefits. That isn't optimal.
I was just reading about Mike Tyson's (possible) comeback w/video, and your point here reminded me of one of my favorite quotes of all time, attributed to Mike Tyson: "Everyone has a plan until they get punched in the mouth." Great point, Nisiprius.

Me? I'm a bird-in-the-hand kind of guy, so it'll be 62 for me. I'm not saying SS is a Ponzi scheme but as a Fed, I've been furloughed way too many times to put any degree of faith into some promised, much higher payment 8 years later. I want as much $$ back as possible, as soon as possible, to mitigate any potential loss.
I remember in school a lecturer talking about what a bad deal social security was. This was in the 70s before they started taxing social security benefits. So I understand your statement about the Feds taking things away from you.
Yeah, I just don't trust it, and I think I never could seeing what I've seen from my perspective. I'd rather "cash out" at a hypothetical loss, rather than to hope and pray it all works out. I trust my own portfolio and withdrawal strategy far more than I ever would that, and I'm willing to eat a percent or two of hypothetical "return" from delayed SS for that peace of mind.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by michaeljc70 » Thu May 14, 2020 11:34 am

grabiner wrote:
Thu May 14, 2020 11:11 am
michaeljc70 wrote:
Thu May 14, 2020 11:04 am
grabiner wrote:
Thu May 14, 2020 10:59 am
That article is primarily intended for self-employed people. Paying more FICA is a much better deal for employees, who pay only half the tax (with the other half paid by an employer for no cost or benefit to you) but receive the whole benefit.

This is relevant for such issues as whether to use payroll deduction to make your HSA contributions. If you contribute $2000 to an HSA by payroll deduction, this reduces your salary by $2000, so you pay $153 less in FICA, and your employer also pays $153 less. This is close to break-even if you are above the second bend point, and a big loss if you are below the second bend point; see Payroll deduction on the wiki.
Don't you think employers account for that when they set your salary? And self-employed people adjust likewise. As someone who worked self-employed much of my life I always baked that extra FICA tax into my rate. If employers didn't pay that they could (and probably would) pay workers more.
Employers account for the cost of FICA when they set your salary, since it is a cost of hiring employees.

However, once you are already employed, you may have options to affect your FICA such as payroll deduction. If you contribute $2000 to your HSA by payroll deduction, your employer will not give you a $153 raise to reflect the $153 it saved in payroll tax. Therefore, your decision should be based on whether the lost Social Security benefit is worth more or less than $153 to you. (If you were self-employed, then you would save the whole $306, and would compare the value of the benefit to $306.)
Sure. But that is minor ($150/year) and has little impact on the big question of whether SS is a rip off mostly. With the HSA, just like health insurance, employers know not everyone will sign up. They have past stats and can guess on an annual basis. Likewise, most places will not give you anything if you choose not take their health insurance. Some will give you something, but it is usually much less than the employer cost of the insurance.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by livesoft » Thu May 14, 2020 11:43 am

Stinky wrote:
Wed May 13, 2020 10:12 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
The bank would require you to buy life insurance with them as the beneficiary. :twisted:

Mortality credits have to come from somewhere.
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Stinky » Thu May 14, 2020 11:47 am

livesoft wrote:
Thu May 14, 2020 11:43 am
Stinky wrote:
Wed May 13, 2020 10:12 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
The bank would require you to buy life insurance with them as the beneficiary. :twisted:

Mortality credits have to come from somewhere.
Maybe a chance for the bank to sell the dreaded whole life product. :mrgreen:
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Re: Does Delaying Social Security Deliver an 8% Return?

Post by illumination » Thu May 14, 2020 11:49 am

I think delaying Social Security is the smart move for many reasons, but I also think the 8% figure being thrown around sometimes implies that it's like a bond with the same amount plus an additional 8% on top of it every year. In reality, it's swapping earlier years for a larger payout in later years. If everyone lived the same age the actuarial estimates said they would, it's the same amount of total money regardless of when you decide to take it.


The higher amount though is extra longevity insurance in case you live longer that you are "supposed to" plus it gives you time to move funds out of your retirement accounts at a lower tax rate. It also locks that higher payout for life. If you delay and don't live as long, you'll be dead and not care. Outliving your savings is no longer a concern. If you take it early and you live longer, it could be a hardship later in life.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by willthrill81 » Thu May 14, 2020 11:57 am

illumination wrote:
Thu May 14, 2020 11:49 am
The higher amount though is extra longevity insurance in case you live longer that you are "supposed to" plus it gives you time to move funds out of your retirement accounts at a lower tax rate. It also locks that higher payout for life. If you delay and don't live as long, you'll be dead and not care. Outliving your savings is no longer a concern. If you take it early and you live longer, it could be a hardship later in life.
That summarizes my thoughts as well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by SethJane42 » Thu May 14, 2020 11:57 am

Deleted--I was wrong
Last edited by SethJane42 on Mon Jun 08, 2020 6:55 am, edited 1 time in total.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Halicar » Thu May 14, 2020 12:08 pm

Stinky wrote:
Wed May 13, 2020 10:12 pm
Halicar wrote:
Wed May 13, 2020 6:32 pm
It seems like if this is really true, it would create a great arbitrage opportunity. Retiree turns 62--financial institution pays them each month what they would have gotten from SS, plus say 4%. Then if and when the retiree turns 70, they receive the higher SS payments and pay the financial institution back the difference. Would that work? Is it legal?
And if the retiree dies at age 69 years and 11 months, having received almost 8 years of payments from the bank and paid nothing back, who does the bank sue? :oops:
Well, of course they'd just take the loss on that one. My point is that if this 8% return is really accurate, then the bank should more than make up for it with the person who lives to 95. Thinking more about this, though, it seems like there are other risks that make it unworkable.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by Dottie57 » Thu May 14, 2020 12:19 pm

willthrill81 wrote:
Wed May 13, 2020 4:06 pm
There's a big difference in an increase in returns and an increase in payout. Delaying SS benefits does the latter, not the former.

While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Absolutely true. However you get the greater benefit amoubt for the rest of your life - whether a month or 30+ years.
Last edited by Dottie57 on Thu May 14, 2020 12:25 pm, edited 1 time in total.

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Re: Does Delaying Social Security Deliver an 8% Return?

Post by willthrill81 » Thu May 14, 2020 12:21 pm

Dottie57 wrote:
Thu May 14, 2020 12:19 pm
willthrill81 wrote:
Wed May 13, 2020 4:06 pm
There's a big difference in an increase in returns and an increase in payout. Delaying SS benefits does the latter, not the former.

While delaying SS benefits results in greater benefits, this is offset (at least partly) by the fact that you are not getting any benefits at all during the period in which you are delaying benefits.
Absolutely true. However you get the greater benefit amoubt for the rest of your - whether a month or 30+ years.
Indeed, which is why delaying SS benefits is a great form of longevity insurance, probably the best available to most retirees today since CPI linked SPIAs are no longer available.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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